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Should you take venture capital?

In my short blogging career, this is the first time I am posting twice in one day. I can't help but respond to Mobius' Seth Levine and his thoughts about not taking venture capital.

Let me first say that there obviously are good and bad times for venture capital. The first question should always be - what is the long term goal of the business and what is the exit strategy? Far too often entrepreneurs do not solidify this basic concept and embark on their ventures without knowing this. Do you want to grow large and aim to hit the public markets? Do you want to stay private and pocket the profits? Do you want to be doing this for five or ten years or for the rest of your life or do you want to bail with substantial value in equity after it is sustainable? This is an imperative before deciding to launch.

The description of venture investors as active, vociferous, and pressuring can be true. This is precisely the reason you want to ask all of these questions and more. Rather than go into details in this broad topic, I will focus on the example of the entrepreneur who has never taken VC money vs the serial entrepreneur who has successfully taken VC money.

Venture capital can be great for the entrepreneur who has never taken venture capital. It forces the entrepreneur to be aggressive and grow, to see if the business really has legs and traction. It forces the entrepreneur to report to someone who usually has more experience and knowledge. I know several entrepreneurs who have never taken venture capital and should. They have taken the leap to start businesses and have gotten some money from close friends and family, but what they really need is to be accountable to an investor who is concerned with the bottom line - an investor who will commit capital and a set amount of time to seeing if the bet will pay off. An investor who will not hesitate to replace the founder or entrepreneur if he is not cutting it. And perhaps most importantly an investor who will legally bind the entrepreneur into devoting everything to the business.

Seth's example is a great one of an entrepreneur who should not have taken venture capital, right? Well, I submit that Seth's friend is better off for taking venture capital. He took investors who realized the time value of money and placed a bet on him and his company to produce. Ultimately his company crashed but that is far better off than being the walking dead. I believe entrepreneurs whose companies fail after taking venture capital are better entrepreneurs from the experience. Without knowing the details, I suspect that Seth's friend has a stronger company now than it would have been had it not taken venture capital.

Whenever I talk about this topic I inevitably bring up the "serial entrepreneur" who uses venture capital to his advantage. I am talking about the entrepreneur who starts a business who plans an exit in 3 to 5 years. This is the guy (or gal) who thinks like a venture capitalist and whose plan is to have the company go public or be acquired in his time frame or have built substantial value in his equity by the time he hands it over to another CEO or whomever his venture investors deem appropriate. In essence, this is the guy whose own VC currency is his sweat equity. This is the entrepreneur who understands the time value of money as well as the value of his own time. He does not want to spend his whole life building equity in his company. He wants to build something and then ride the steep part of the curve and then get off to start another venture.

I know a bunch of guys like this, one that comes to mind who I have invested with before is Andy Klein, founder of Wit Capital, which ultimately was bought by Schwab, and founder of Soleil Securities. If you follow the career of a guy like Andy, you will find someone that welcomes venture capital and allows VCs to ride his talent and conversely someone who utilizes VCs and rides their talent.

So while I agree with Seth that entrepreneurs should "look before they leap" into taking venture capital, I believe all entrepreneurs benefit from venture capital. I guess then the key question that each entrepreneur needs to answer is this - "What type of entrepreneur do you want to be?"

Comments

Great post James!

I think the point you made about serial entrepreneurs is so important that it needs emphasis like 10 times over.

Founders who thinks like VCs make better CEO's because they squeeze operational risks out of their ventures, they understand the notion of risks, and ultimately protect their ventures from unnecessary risks to skew probability of success in their favor, the favor of their employees, investors and partners.

Entrepreneurs thinking like VC's aligns objectives of both parties, makes better companies, protects entrepreneurs from unsystematic risk and is just a better way to practice entrepreneurship (better for being risk efficient).

That said, the idea of building portfolios rather than companies is a major shift in thinking for the world's agents of capitalism, economic growth and innovation.

i think the question at the end is the perfect decision making for one's entrepreneur career ... there are entrepreneur who just cant ride the same car (business) year after year - they need new vehicle (startup) to prove their worth - they neither care for the control nor whether the VC would be able to create any value after he leaves. These kind of entrepreneur are driven by the ideas and not by staying with the same company forever ... the best thing for them is to create the value in first couple of years and then give up the stake to VC or get bought by some other company and move on to next idea... they just cant wait to create something new from the scratch - they like to be a King-maker all the time.